Money On The Sidelines
While the world of mainstream media stock pundits would like investors to believe that there is a wall of money on the sidelines waiting anxiously to go all-in on stocks (bear in mind there's a seller for every buyer and where does the cash on the sidelines go when it is handed over to the seller in return for his stock?), as none other than Charles Schwab notes in this brief Bloomberg TV clip, "investors are less rattled" than most believe, "and have stayed invested" in large part. "There hasn't been a wholesale movement away from stocks," he goes on, busting myths asunder, adding that "investors want to see market-driven conditions, not Fed manipulated ones."
While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while these 3 pictures can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.
Credit markets have been nervous for over a week. Treasury yields have been rising notably. The USD has been pushing higher and with all eyes focused on the momo name du jour (and indices 'near' all-time highs) it seems few have noticed US equities have actually had 3 down days in the last 5 days. Only NASDAQ managed a green close. Of course, this is merely an excuse buy moar with all the money on the sidelines but today's move in Treasuries (and intraday volatility in stocks) suggest some anxiety is back that a flow-slowing Taper is closer on the horizon of hope than many believe. Oil and Gold lost ground on the day - though the latter is the best of the commodities on the week. The USD is back to unchanged on the week (with CAD and EUR weakness in charge). VIX diverged higher into the close with its first up-day in the last six.
Global stock markets are soaring and near record highs. Credit markets are exuberant and near record tight spreads and low yields; and volatility (bond, FX, and stock) has been suppressed to the point of non-existence. So why is it that just 3 months after Nigeria issued debt (in an oversubscribed auction) at a yield below that of Portugal's, Nigerian lender Diamond Bank has suspended the launch of its seven-year $550 million bond? It appears it's the Fed's fault! as the bond's marketers noted "pricing turbulence in the international debt market," in a presentation seen by Reuters on Tuesday. Still think the Fed will ever actually exit?
With the Dow Transports leading the way (now up for the 10th of the last 11 days and 9.7% off its debt-ceiling-debacle lows), US equity markets are engorged on the euphoria of this "can't lose" scenario that offers free lunches (and ponies) for everyone. On the heels of SocGen's call (eerily reminiscent of Schiff's and Faber's prophecy of rising QE no matter what), it's 315pm, have you greatly rotated your money on the sidelines to BTFATH yet?
One of these things is not like the other...
The following story from Bloomberg's Jonathan Weil should be familiar to anyone who i) wanted to get rich quick; ii) wasn't too willing to read the small print, and iii) put their faith in a TBTF bank. Or simply watches South Park. Jon recounts the story of "Philip L. Ramatlhware, an immigrant from Botswana who went to a Citigroup branch in downtown Philadelphia one day five years ago to open a regular bank account. He was 48 years old at the time and disabled, after being hurt in an accident as a passenger on a Greyhound bus. In April 2008, he received $225,000 in a settlement for his injuries, part of which went to pay legal fees. He was holding the settlement check when he walked into the branch. Immediately he was referred to a broker for a “financial consultation,” according to an arbitration claim he filed against Citigroup. The broker assured him the money would be invested in “guaranteed” funds and that he could have access to them whenever the need arose, the complaint said. Ramatlhware gave him $150,000 to invest. The broker put $5,000 into a bank certificate of deposit, bought a $133,000 variable annuity and invested the rest in a series of mutual funds. Less than six months later, Ramatlhware had lost $40,000, according to the complaint."
Tired of having your easily-earned (thanks to Benny and the Inkjets) wealth effect go straight to fund the pressure cooking terrorist operations of ole' evil Osama (because that's how stock market investing apparently works)? Have no fear: because Uncle Sam wants you to invest in The Patriot Fund. "The Patriot Fund, www.patriotfund.com, was launched to meet the previously unmet need of a terror-free investment option." So... there is an unmet need of terror-free investing? It appears so. And while Uncle Sam doesn't actually demand you invest your "money on the sidelines" in this latest carnival attraction of the ever more ridiculous US stock market circus, we give it a few months before it becomes a choice: put your money here or get an IRS audit. Because what is more important than "terror-free" investing?...
Much has been made of equity inflows this week (though we note a significant outflow from high-yield bond funds - just as risk-on in its nature) and once again the money-on-the-sidelines fallacy is hawked at every opportunity. Two critical aspects are important to get past this 'fact' as some positive driver. First, money does not 'enter' the market, it is swapped (e.g. Person A's cash is used to buy shares from Person B; after the transaction the roles are swapped with Person B holding cash on the sidelines and Person A holding shares); and secondly, as Morgan Stanley's Gerard Minack notes, despite all the disclaimers – retail flows assume that past performance is a good guide to future outcomes. Consequently money tends to flow to investments that have done well, rather than investments that will do well.
It seems equity markets at all-time highs, high-yield funding markets near all-time low yields, and supposed money on the sidelines flooding back into stocks are just not enough to provide cover for the latest IPO:
*TOYS R US FILES TO WITHDRAW IPO :TOYS US
Not citing any specific reasons for the withdrawal, we suspect the weather and market conditions will be blamed as they just reported abysmal earnings of $239mm vs $343mm last year and sales down $155mm from last year (with Q4 comp sales -4.5% domestically and 5.4% international). Back to the drawing board for KKR and Bain to push this off to the next greater fool.
While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while a picture can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.
With yields compressed to record low levels, thanks to Bernanke's repression, and a consensus expecting margin stability and a huge hockey-stick in earnings going forward, the question is why aren't there more LBOs? Earnings yields relative to high-yield financing is back up at levels seen during the LBO Boom of 2003-7 and Private Equity shops appear full of money on the sidelines, so why aren't there more LBOs? At its simplest level, an LBO is enabled by a relative mis-pricing between debt and equity ‘costs’ that a private equity firm can utilize to fund the deal (cheap credit relative to equity in the WACC). These factors appear defensible but the main fear we have is their sustainability.
If yesterday's indications of the near-record overweight net long positioning in Russell 2000 Futures & incredible net short VIX futures positioning, along with the extreme flows contrarian indication was not enough to concern investors that the 'money' is in, then the following four charts should cross the tipping point. Citi's Panic/Euphoria guage for US stocks has only been more euphoric on two occasions - Q4 2000 & 2008; Goldman's S&P 500 positioning has only been this extremely long-biased on two occasions - Q4 2008 & Q2 2011; and Barclays' credit-equity divergence has only been this over-bought stocks on two occasions - Q4 2008 & Q2 2012. It doesn't take a PhD to comprehend the extent of excess priced into stocks currently - no matter what Maria B tries to tell us.
Much was made of the first two days of this year as indicative of the great 'meme' that every sell-side rep and commission-taking asset manager has pumped investors full of - the 'great rotation' is here. Finally, rates were rising, growth was here, money on the sidelines was moving, and the supposedly 'dumb money' was rotating from bonds to stocks. However, that is not what happened now is it? 10Y yields are now practically unchanged on the year - even as stocks continue to be bid - with the major divergence beginning on January 11th. There is, however, an alternate 'great rotation' that appears just as powerful - that of covering idiosyncratic AAPL longs and rotating into systemic long equity positions (or covering AAPL-hedging short equity index positions). We suspect, given the volume shifts below, that much of the mysterious buying power in S&P 500 futures is indeed beta-hedge unwinds from massively over-exposed AAPL longs unwinding. With AAPL's earnings due tonight, perhaps this 'rotation' will be over.